One of the few instances where the music industry did right in recent years was the introduction of Apple’s iTunes Music Store. Hesitant at first, the five major labels eventually agreed to have their music offered online for $1 a track, a price point consumers accepted. The labels make most of the profit from the store’s sales, even though they are not involved in any of the technological hurdles an online store has to tackle on a daily basis. The labels actually make a higher profit per track from iTMS than if they sold the same tracks on CD, as production, shipping and other costs largely do not apply to digitally sold music. Yet, the labels are now doing their best to ruin a good business model by becoming too greedy.
Even though Apple’s iPod was already a bestseller when Apple CEO Steve Jobs approached the five big labels Universal, Sony, EMI, Warner Brothers and BMG, the labels were hesitant to adopt such “new” technology as offering their music through a Web-based store. Jobs described the effort to convince the labels as one of the hardest things he ever attempted to pull off in his entire career. Jobs also said the labels only agreed because the iTunes Music Store opened exclusively for Mac users at first.
The labels felt they were insulated should something go wrong, as the market share of Mac OS-based computers is somewhere between 5 and 10 percent. Only after the store proved successful with Mac users did the labels agree to allow Apple to offer the same service to Windows users.
In short, the labels did not risk much but had a lot to gain. The scheme worked, and now they are cashing in big time. The store has sold half a billion tracks worldwide, a trend that is accelerating.
The contract Apple negotiated with the labels, however, runs out in 2006.Now, at least one label is reportedly asking for more money. Any licensing fee increase would have to be handed down to the customers in order for Apple to break even.
Customers are likely to respond the same way as they did to rising CD prices and “get” the music through other means, in most cases through illegal file sharing, which would in turn decrease profit margins. The latter is probably going to annoy labels the most.